Thursday, January 25, 2007

Brad Delong cites AngryBear on Tyler Cowan

The issue of income distribution is problematic. We like to think that income is a function of virtue (i.e., hard work, honest dealings, etc.), but the reality is that it is also a function of endowments at time of birth. The most conventional of these endowments is parental wealth, but the most important (at least within the contect of the United States) is the initial store of human capital--that is, talent.

The initial distribution of talent is anything but "fair." Doctors make a good income in part because they work very hard to become Doctors, but if they also tend to be people who were lucky enough to be born pretty smart.

Remarkably, people seem to be more or less OK with the outcomes that the distribution of talent produces--there doesn't seem to be that much resentment of the incomes of Tiger Woods or orthopedic surgeons. But problems do arise and there is resentment when those who work 40 hours a week cannot grasp certain basics--an affordable house, a decent neighborhood, a decent school for their kids, a reasonable commute. It used to be that people without the intellectual acument to go to college could have these things, but they often no longer do.

These are not unreasonable things for working Americans to want, and there is only one way to make sure they have them--some form of income redistribution. There seem to be two acceptable ways to do this politically. The first is to increase the minimum wage. While conventional economic theory predicts that this will lower employment, the most likely outcome of an increase in the minimum wage is that businesses (all of which are subject to the wage floor) will raise their prices to consumers--implicitly tax all of us who consume. Personally, I am fine with that.

The other method for raising living standards for working Americans at the bottom of the income distribution is to get a larger Earned Income Tax Credit. To do this without increasing the fiscal deficit means some of us will have to pay higher taxes. I am fine with that too. My first choice: increase the tax on gasoline. We'll talk more about that soon.


Morris Davis said...

I'm not sure how raising the minimum wage is going to help anyone afford a good commute. It's not unreasonable to think that the number of parcels in an MSA with "good commutes" is in fixed supply, at least in the short run. This means,abstracting from lots of things, that these parcels go to the households with the highest income. Raising income at the bottom of the distribution will only affect the market price of these parcels, not who lives there.

If we want to help the working poor afford housing, we should build more housing units in areas where people want to live. This will bid down the price of land, which you can either think of as "land" or simply as the market value of property rights. This has nothing, per-se, to do with transferring income across households explicitly through the tax code or implicitly via a minimum wage increase. (Although, an unanticipated increase in the number of building permits in any given area will lead to a direct reduction in the wealth of the current land holders).

Richard Green said...

Morris is of course correct about this.

The problem is that my writing was sloppy--I gave examples of things
related to housing that people at the bottom of the income
distribution have a difficult time affording. I do think an increase
in the minimum wage will make it easier for some people to pay their
rent, regardless of where they live. But it will not increase the
supply of places with "reasonable commutes."

That said, the work of Card and Krueger did convince me that the
minimum wage is not the unalloyed evil that economic orthodoxy
suggests. Personally, I would prefer a larger Earned Income Tax
Credit, but I can live with the second best and more politically
expedient increase in the miniumum wage.

As to Morris' generic point that we should build more units (i.e.,
more densely) in citied with congestion, I am in complete agreement.